A
"hypothetical development" valuation is carried out using
the profit and risk factors to the example shown in highest
& best use to obtain the appropriate land value. The land
values thus determined are:

OPTION 1: $80 000

OPTION 2: $120 000

OPTION 3: $90 000

Therefore,
the highest and best use of the site is as a warehouse because that
use shows the maximum land value of $120 000 when the appropriate
profit and risk factor of 8%pa is applied.

If
the owner of the land above went ahead and built the motel, its value
on completion would be less than "replacement cost new".
This is because the market value of the motel is determined by the
present value of all future income and benefits. The net income
generated will not be sufficient to cover the cost of building and at
the same time provide sufficient reward to the developer for the high
risk.

Such
developments are overcapitalization of the land. Other
examples are:

a large and prestigious
house built in a "rundown" neighbourhood

a large planned regional
shopping centre has just been completed. The highways department issues
a statement that a major traffic bypass will be created diverting
traffic away from the centre. Therefore, the shopping centre is now too
large for the reduced trade area. That is, the site is overcapitalized.